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Constructing a Yield Curve in a Market with Low Liquidity

Author

Listed:
  • Sabit Khakimzhanov

    (National Bank of Kazakhstan)

  • Yerulan Mustafin

    (National Bank of Kazakhstan)

  • Olzhas Kubenbayev

    (National Bank of Kazakhstan)

  • Dulat Atabek

    (Kolesa LLP)

Abstract

Motivated by the shortcomings of the yield curve method used by the Kazakhstan Stock Exchange (KASE), we designed an algorithmic method of constructing a yield curve in a market with low and variable liquidity. We chose Nelson-Seigel as a curve and the ten most recent transactions in each subrange of maturity as the data. Both decisions stemmed from the constraints of an illiquid and inefficient market. The parsimony and rigidity of Nelson-Seigel proved useful when trades are few and prices are far apart. The choice of sampling is meant to produce enough sufficiently spaced observations, albeit at the expense of synchronicity. To provide the user better context for the curve and enable informed interpretation, we recommend supplementing the curves and their parameters with metrics of fit and age of the sample. Using the data from KASE, we computed the curve for each week starting from mid-2010 to end-2018 and made the results publicly available to provide access to interest rate data for analysts and to facilitate macroeconomic research.

Suggested Citation

  • Sabit Khakimzhanov & Yerulan Mustafin & Olzhas Kubenbayev & Dulat Atabek, 2019. "Constructing a Yield Curve in a Market with Low Liquidity," Russian Journal of Money and Finance, Bank of Russia, vol. 78(4), pages 71-98, December.
    • Handle: RePEc:bkr:journl:v:78:y:2019:i:4:p:71-98
    DOI: 10.31477/rjmf.201904.71
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    References listed on IDEAS

    as
    1. Leo Krippner, 2010. "A theoretical foundation for the Nelson and Siegel class of yield curve models, and an empirical application to U.S. yield curve dynamics," Reserve Bank of New Zealand Discussion Paper Series DP2010/11, Reserve Bank of New Zealand.
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    4. Arnaud Mehl, 2009. "The Yield Curve as a Predictor and Emerging Economies," Open Economies Review, Springer, vol. 20(5), pages 683-716, November.
    5. Faria, Adriano & Almeida, Caio, 2018. "A hybrid spline-based parametric model for the yield curve," Journal of Economic Dynamics and Control, Elsevier, vol. 86(C), pages 72-94.
    6. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    7. Nymand-Andersen, Per, 2018. "Yield curve modelling and a conceptual framework for estimating yield curves: evidence from the European Central Bank’s yield curves," Statistics Paper Series 27, European Central Bank.
    8. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
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    More about this item

    Keywords

    yield curve; Nelson-Siegel; Kazakhstan Stock Exchange; algorithm; reproducible; market liquidity; zero-coupon; government bond;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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